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This is a group project, which was submitted for International Accounting at 27th of October 27, 1999

Group 7: IAS 28

Nadarasa Subramaniam
Frederic Schneider
Marit Østhus
Mikael Kronie Pedersen

The IAS 28 p.1
French law and IAS 28 p.4
Comparing the Norwegian Standard with the IAS and the European Directives p.5
The IAS and the Danish Law on Accounting Standards p.7

International Accounting Standard (IAS) 28

The IASC devotes a special standard, IAS 28, to shareholdings, which is referred to as Investments in Associates, conferring significant influence. In this view, IAS 28 defines how the investments in associates should be shown in the financial statements. Under this standard, when an investor has more than 20% of voting power, it generally account for its investment by equity method, whereby the proportional share of the investee's operating results will be reflected in the investor's financial statement.


The scope of this standard is divided into the following:
a. This standard should be applied in accounting by an investor for investments in associates.
b. The standard supersedes IAS 3 consolidated financial statements, in so far as that standard deals with accounting for investments for associates.

Before looking at how the entries are being taken place according to IAS 28, it is better to know what the following terms, which are often being used related to this standard, are being meant by according to IAS 28.

· An Associate
An associate is an enterprise in which the investor has significant influence and which
is neither a subsidiary nor a joint venture of the investor.

· Investor
A business enterprise that holds an investment in the voting stock of another enterprise.

· Investee
Invstee is an enterprise that issued voting stock that is held by an investor.

· Joint Venture
A contractual arrangement, whereby two or more parties undertake economic activity subject to their joint control.

· Control (For the purpose of this standard)
Control is the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

· Joint Control
The contractually agreed on joint sharing of control over the operations and/ or assets of an economic activity.

· A Subsidiary
A subsidiary is an enterprise that is controlled by another enterprise, which is often referred to as the parent company.

· Significant Influence
The power of the investor to participate in financial and operating policy decisions of the investee, this is the less than the ability to control these policies. If an investor owns either directly or indirectly through subsidiaries, 20% or more of the voting power of the investee, it is presumed that investor has significant influence. Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of voting power of investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. The existence of significant influence by an is usually evidenced in one or more of following ways:

a. Representation on the board of directors or equivalent governing body of the
a. Participation in policy making process.
b. Material transactions between the investor and the investee.
c. In charge of managerial personnel or
d. Provision of essential technical information.

Methods of accounting for Investments in Associates

According to IAS 28, there are mainly two different methods, which are being applied to evaluate investments in associates, when we prepare the financial statements.

1. Equity Method
2. Cost Method

Equity Method

Under the equity method, the investment is initially record at cost and the carrying amount is increased or decreased to recognise the investor's share of profits or losses of the investee after the date of acquisition. Distributions received from an investee reduce the carrying amount of the investment. Adjustment to the carrying may also be necessary for alterations in investors's proportionate interest in investee's equity that have not been included in the income statement. Such changes include those arising from the revaluation of property, plant, equipment and investments, from foreign exchange translation differences and from the adjustment of differences arising on business combinations.

Cost method
Under the cost method, an investor records its investment in the investee at cost. The investor recognises income only to the extent that it receives distributions from the accumulated net profits of investee arising subsequent to the date of acquisition by the investor. Distributions received in excess of such profits are considered a recovery of investment and are recorded as reduction of the cost of the investment.

French law and IAS 28

The issue of IAS 28 (Accounting for investments in associates) deals with both individual and consolidated accounts. That makes this issue extremely broad from the point of view of French standards. Thus, sometimes we cannot avoid some references to the consolidated accounts (IAS 27). So instead of presenting all the details and the differences between IAS 28 and French law we prefer to notice several points that reflects the mains differences.

First of all it is important to notice that the accounting law of April 1983 and the law on consolidated accounts of January 1985 have permitted the transposition of the Seventh Directives into the French law; that shows the implication of French institutions for harmonisation.

We have seen in the first part of this presentation the meaning of significant influence. Briefly we can remember whether the investor holds 20 percent of the voting power of the investee it is presumed that the investor has significant influence, but in order to evidence this influence IASC uses also 5 factors (representation on the board of directors or equivalent governing body of the investee; participation in policy making processes ; material transactions between the investor and the investee ; interchange of managerial personnel; or provision of essential technical information). On the contrary the 20 percent rule is the only standard for the French law. What is quiet interesting is that la CNCC (Compagnie Nationale des Commissaires aux Comptes) - the institution responsible for all auditors - advises auditors to use these 5 points to evidence the significant influence .

Moreover French law does not have the term associates. It considers on one hand the subsidiary (the investor holds more than 50 percent of the voting power) and on the other hand the « investments » (it holds less than 50 percent). In that last case the cost method will be used.

Further the equity method (« mise en équivalence ») is not considered as a method of valuation but as a method of consolidation . It means that the consolidating company will use this method only if the investor has significant influence on the investee and only if the consolidating company has to draw up consolidated accounts. Thus you will never see this method used with investments in associates in individual accounts.

As a conclusion we can say that the problem of accounting for investments in associates is not a real problem in France because the method of valuation normally used is the cost method. But we have seen through those few lines that dealing with equity method is also dealing with consolidation in French law that is proposed in IAS 27.

Comparing the Norwegian Standard with the IAS and the European Directives

Norway is not a member of the European Union. "But as far as accounting is concerned, there is no difference whether or not a particular country is a member of the European Union since in 1992 the trade organisation EFTA made an agreement with the EU that included, among other things, the obligation for EFTA countries to incorporate the European directives on accounting into their legislation." (International Accounting, Walton et. al, London 1998). The implementation of the directives was one of the driving forces for The Norwegian Accounting Act 1999 (Regnskapsloven 1999). This means that some changes in the Norwegian legislation were necessary to comply with the EU directives. (Finansregnskap med analyse, Arne Kinserdal, Oslo 1996).

The Norwegian Accounting Act 1999 contains a new regulation/provision when it comes to accounting for investments in associates. Historical cost is the main rule about valuation of fixed assets. An exception to the principal rule can be seen for valuation of investments in associates - the equity method shall be used for this type of investments. § 5-8 says: "Investments in associates have to be accounted for in consolidated financial statements under the equity method and can be accounted for in the separate financial statements under the equity method." (Revisors håndbok, DNR, Oslo 1998). The cost method was used prior to this regulation.

IAS 28 and the seventh council directive says that the equity method should be used in the consolidated financial statements when accounting for investments in associates.

IAS 28 and the fourth council directive allows the equity method to be used in the separate financial statements when accounting for investments in associates.

This means that the Norwegian standards do comply with the international standards when it comes to accounting for investments in associates. This is a result of The Norwegian Accounting Act 1999. But in fact, a lot of the Norwegian companies have voluntarily rewritten and presented the account in accordance with the international methods before the implementation of the new provision. The reason is that most of the big Norwegian companies are dealing with international markets. Statoil has for instance prepared the account in accordance with the IAS for many years.

The IAS and the Danish Law on Accounting Standards

The IAS 28 (reformatted in 1994) applies for the Årsregnskabsloven (Danish Law on Accounting Standards) for all yearly accounts beginning on or later than 1/1/1990.

The IAS' definition of an associated company corresponds to the Danish definition , both being when a company (and in the Danish case, it's subsidiaries as well) enjoy significant influence over another company. Significant influence being defined as 20% or more of the voting rights, as well as having a say in the operating and financial control of the company. The only difference being that the definition of significant influence and what an associated company is, are placed in a single paragraph in the Danish Standard, while it is spread over 2 points in the IAS.

The rules for including the associated company in the company's consolidated accounts and in the investors fiscal accounts corresponds to the Danish Law on Financial Standards in all important area's. A small difference is that the Årsregnskabslov prescribes that the consolidated accounts group equity shares into 3, one of these being associated companies, the other 2 being subsidiaries and other securities and equity shares.

The rules in the IAS concerning the capitalisation of dividends, revaluation's in equity as a whole, the companies share of the profits, all correspond to the Årsregnskabslov. The Årsregnskabslov does state that the accumulated net-revaluation (gains) of the share of the equity in the associated company are to be placed in reserve for net-revaluation using the equity method, and that this cannot be used for distribution or dividends.

There is no demand for special or specific information concerning a share of (the associated) company's exceptional items or items concerning past financial accounts in the Årsregnskabslov.